Keith's Macro Notebook 3/17: Asia | USD | Oil

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.

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EVENTS

COMPANY NEWS

MGM- Registered investment manager, Land and Buildings, issues investor presentation proposing REIT conversion, which it believes offers MGM the opportunity to monetize real estate and reduce leverage in a cost- and tax-efficient manner. Land and Buildings believes the net asset value of MGM is $33 per share and sees a path towards $55 per share value. They intend to nominate four highly-qualified candidates for Board.

ARTICLE HERE

Takeaway: The REIT frenzy continues, however, hurdles exist. MGM carries a lot of financial leverage. Moreover, MGM’s EV/EBITDA multiple (ex Macau) is pretty high and not too far off from the current weighted average GLPI/PENN multiple. We will have more color on this.

Bloomberry - said its subsidiary Solaire Korea Co Ltd has signed an agreement to acquire up to 92% of Golden and Luxury Co Ltd, which owns and operates T.H.E. Hotel and Vegas Casino on South Korea’s southern holiday destination Jeju Island. Solaire Korea has also signed a deal to buy the 20.96-hectare (51.79-acre) Silmi Island near Incheon in the north of the country

The casino operator gave no value for the deals announced on Tuesday. Both transactions are still subject to South Korean government approvals.

Takeaway: South Korea has been getting a lot of attention lately. Everybody wants a piece of the action.

Cruise shipping Miami pre-conference tidbits and other news -

John Tercek, VP of new business development at Royal Caribbean Cruises Ltd., rattled off dozens of cruise markets that will be developed around the world and the challenges they face. Most markets, he said, are not as saturated as Australia and New Zealand, where 1 million people out of 20 million travel on cruise ships. However, Royal Caribbean is still seeking new international customers in Australia, in addition to Germany, France, Mexico, Brazil, China, Colombia and Hong Kong.

Big ships won't be able to go everywhere.

"A lot of [destinations] in Asia are on rivers, it's different than a deep water port," Tercek said. He noted that a destination like Myanmar will only be able to handle small ships because of its geography.

Just because you build it, doesn't mean they will come.

Cruisers don't want to travel to a destination and find a water park similar to the ones they left back home, said Marc Melville, director of Chukka Caribbean Adventure Tours. He stressed that travelers will pay more for experiences that are unique to their destinations.

"People want multiple experiences on one site for less money and usually for less time," Melville said. "Stay local, stay local, stay local."

China Cruise Shipping Conference and Show Confirmed for Shanghai in October

MSC South America: While many cruise lines are decreasing the number of ships in South America, MSC's bookings there are up, said Gianluca Suprani, MSC's head of global port development and shore activities. Santos, Rio de Janeiro, Buzios and Buenos Aires are some of the hot ports of call.

Shore excursions: Cruisers are searching for “authentic” and “exclusive” shore excursions and tours - and they're willing to pay more for the experience.

Azamara has committed to Australasia for a third season in 2018, with Azamara Journey coming for the first time in 2017 and Azamara Quest returning the next year.

Rumors:

MSC Cruises USA has promised a “big announcement” during a Tuesday afternoon press conference. The rumors won’t stop that one of the MSC newbuilds is heading to homeport on the East Coast, could this be the confirmation? It would be coming more than two years out.

INDUSTRY NEWS

Singapore floating casino - A spokesman for New Century Tours, the ship's Singapore-based tour operator said, "Our business dropped drastically after the casinos opened. We had fewer than 500 passengers on some days. But as the (Singapore) casinos lost their novelty, the crowds started to come back in 2013." Now, the spokesman said, it gets between 600 and 700 passengers daily, four in five of whom are Singaporeans, and the rest, Malaysians.

There used to be three such floating casinos in recent years, but Leisure World is the only one known to be operating close to Singapore now.

Takeaway: This is exactly how a brand should NOT behave. If Herbert Hainer was the CEO of a US company instead of being domiciled in Germany, he'd have been fired years ago. We understand that a company has to look hard at the ROI when it comes to endorsement deals, and it's pretty obvious that the $36mm and change the company coughed up per year to put it's logo on NBA jersey's wasn't making adequate returns as the company continued to shed market share in the basketball category. But, how would NKE have handled this situation? Look no further than the Man-U negotiation where Nike stepped away from a 13-year kit deal with the club only after bidding up the annual fee by 3.2x from £23.5mm per year to £75mm. Now it's a one horse race for the NBA deal which means Nike will pay far less to sponsor a category that it already dominates than it otherwise would had AdiBok played its cards closer to the chest. Who else could compete for this deal? UA needs to be in the conversation, and maybe a Chinese player like Li Ning, though we doubt the NBA would go that route. Let's say the new deal comes in at $45mm per year, that's just 4.5% of NKE's existing endorsement budget, for UA it's 50%.

Now AdiBok wants to focus on NFL and MLB athlete endorsement deals. We'll give the company the benefit of the doubt for this exercise that it knows what it is doing. Think about what that means for Adi's existing wholesale partners. Those are not categories that translate to more floor space. Which means NKE, who already accounts for around 70% of purchases for FL and FINL, becomes even more dominant in it's assortment. The best possible environment for an athletic retailer is when the major brands are heavily competing for shelf space. FL and FINL want nothing more than to have a strong staple of contenders looking to take a few points of share. That's not gonna happen.

ICSC RETAIL SALES (80 General Merchandise Stores)

Takeaway: Two relatively positive data points from the ICSC to start March, though on a 2-yr basis we saw a slight deceleration for the week ended 3/14. Not the type of strength we would have expected given the easy compares from last year. Two more weeks for retailers to make up some lost ground before comps get much tougher through Spring and Summer.

TWTR: Are Acquisitions Enough?

Takeaway:TWTR tried to warn consensus, but they weren’t listening. TWTR now needs to hasten its M&A pace, but we doubt the street pay up for that.

KEY POINTS

THE ISSUE WITH THE MODEL: Monetization has been both TWTR’s largest source of revenue growth, and what we believe will be its biggest challenge moving forward. We estimate that a persistent surge in ad load has been driving monetization, which will be a difficult feat to sustain; at least as it relates to revenue growth expectations through 2016.

WAS CONSENSUS LISTENING? On the 4Q14 call, TWTR’s CFO quantified the 1H14 benefit from the Olympics, and the much bigger World Cup (non-recurring tailwinds with no comparable event in 2015). That said, consensus estimates suggest that adjusted advertising revenue growth (ex events) will moderately decelerate in 1Q, and then slightly reaccelerate in 2Q15; a tall order for a company struggling to drive ad engagements above user activity.

ARE ACQUISITIONS ENOUGH?: We believe TWTR needs to acquire growth to hit 2015/2016 consensus estimates, and the company appears to be moving toward another acquisition push in 1Q15 QTD. We doubt the street will accept inorganic upside, but we're not sure when they will recognize it. Further, we don't believe TWTR can sustain this acquisition push, especially as move closer to 2016. We remain short, but this one could go against us until the street realizes TWTR's guided upside isn't organic.

THE ISSUE WITH THE MODEL

TWTR has three core growth drivers:

User growth (MAUs)

Engagement (Timeline views/MAU)

Monetization (Ad revenue/timeline view).

Monetization has been TWTR's chief source of growth over the LTM, but is also where we expect TWTR to see the most pressure through 2016. The reason is ad load, which we estimate has been driving monetization. It’s not that TWTR can’t increase ad load, but we don’t believe it can do so at a rate that can drive the revenue growth the street is expecting (68% and 53% in 2015 and 2016, respectively)

TWTR is well past the 2Q13 Supply Shock, which we believe was a sudden and sustained surge in ad load that drove much of TWTR's revenue growth through 2014 (more detail in our note, and S-1 excerpt below).

﻿﻿TWTR S-1/A MD&A (11/4/2013): “The decreases in cost per ad engagement over these periods [3Q12-3Q13] were primarily due to an increase in supply of advertising inventory available in our auctions, which was partially offset by increased demand for our Promoted Products. Supply of advertising inventory increased as we expanded the distribution of our Promoted Products to our mobile applications and additional markets outside of the United States in 2012. The increase in advertising inventory provided us with additional opportunities to place ads on our platform.”

Now TWTR is at a point where it’s struggling to drive ad engagements above user activity, which means TWTR must find a way to drastically improve its ad targeting ability, or increase ad load at a disproportionately higher rate to achieve comparable ad engagement (TWTR runs a CPC Ad Model).

WAS CONSENSUS LISTENTING?

During the 4Q14 call, TWTR’s CFO (Noto) quantified the 1H14 benefit from the Olympics, and the much bigger World Cup. Both events are non-recurring tailwinds with no comparable event in 2015. The 1H14 benefit was provided in q/q terms, so we translated it to y/y terms for context. These events provided incremental revenue growth of 10% and 20% in 1Q14 and 2Q14, respectively.

We believe the reason why Noto quantified this incremental benefit was to temper 1H14 expectations/estimates, but estimates still rose after the print. Now consensus estimates suggest that adjusted advertising revenue growth will moderately decelerate in 1Q, and then slightly reaccelerate in 2Q15; a tall order for a company struggling to drive ad engagements over user activity. For context, the only time TWTR reported accelerating advertising revenue growth (ex events) was 3Q13: the quarter following the 2Q13 Supply Shock.

ARE ACQUISITIONS ENOUGH?

We believe TWTR needs to acquire growth to hit consensus estimates in 2015/2016. The tea leaves have been pointing toward another acquisition push, similar to 2Q14 & 3Q14 when it spent a combined $165M in acquisitions. So far in 1Q15, TWTR appears to have already spent $160M on acquisitions (based on preliminary data complied by Bloomberg).

We doubt the street will accept inorganic upside, especially if its favors the Data segment (similar setup to 3Q14 when the stock sold off). However, the other questions is when will the the street recognize inorganic upside, which will be harder to isolate since TWTR is not reporting timeline views moving forward.

But the better question may be how long can TWTR sustain its M&A spending spree. TWTR has an inconsistent history of generating cash flow. TWTR currently has roughly $3.6B in cash ($1.8B was raised in 3Q14), and the company had guided to $500M-$650M in 2015 Capex (with no mention of acquisitions in guidance). While it’s possible that TWTR can acquire enough growth to achieve the 68% growth the street is expecting in 2015, the feat will be that much harder in 2016 when TWTR needs to generate another 53% on top of that.

We remain short, but this one could go against us until the street realizes its guided upside isn't organic. Timing that is the challenge.

Let us know if you have any questions, or would like to discuss in more detail.

Hesham Shaaban, CFA

@HedgeyeInternet

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